Gold Investing Really Does Belong to the Stone Age

By James Altucher

The other day I wrote an article about why I think gold is a worthless rock. Over at SmartMoney, a sister company to the Wall Street Journal and wsj.com, Don Luskin asked some valid questions about my position. I’ve known Don for years and have even broken bread with him (or steaks, since he didn’t eat carbs at the time). So I’m more than happy to educate my colleague.

Don asked how I chose the dates I used to measure gold’s performance. The specific dates don’t really matter to me. From 1800 to 1970, gold had a negative return adjusted for inflation. Then we got off the gold standard, and it rocketed up to its all-time high over the next decade. Since then, inflation-adjusted, it’s been downhill. It would have to double from here in order to gain parity with where it was 30 years ago.

Don asks if I know what the S&P 500 has returned since the 1800s. Professor Robert Shiller at Yale has the data for 1871 to the present for the stock market. Here’s a summary. It shows how stocks have returned 7.11% since 1871, inflation adjusted. Gold, by comparison, has returned less than 1% per year.

When I wrote about gold it was at $1,205 an ounce. Now it’s $1,190. This proves nothing at all, of course. My article is intended for people who wonder whether or not gold is a valid long-term investment. Perhaps this past decade has been good for gold and bad for stocks. But over the past 50 years, 100 years, 200 years, capital markets grow and gold stays the same or goes down. My guess is the same will happen over the next 10, 50, 100 years.

Don asks: If it’s a “fear metal,” which is what I call it, then why didn’t it go down in 2008? In 2008 we had the worst liquidity crisis in history. It was a liquidity crisis more than a fear crisis. All money redeemed from every asset class, including gold, and went to cash, which is why the dollar strengthened. Now, we don’t have a liquidity crisis. Instead we have an oil spill crisis, we have financial regulation, we have health care, we have rising taxes… in other words, we have fear. I’m afraid, at least. But I’m not afraid that all the banks in the world will go bankrupt.

I point out that stocks are an inflation hedge. Don asks why they weren’t an inflation hedge in the 1970s. He says gold is a better inflation hedge. In the 1970s, about 10% of the S&P 500′s revenues came from abroad. Now it’s about 40%. So U.S. companies do a lot better now than they did in the ’70s when the dollar weakens. Stocks and companies change, adapt, grow. Gold never changes. Between 1968 and 2007 the correlation between gold and CPI was a measly 0.14. Gold and inflation have nothing to do with each other. I don’t want to be accused of cherrypicking 1968, even if it was the year I was born. Here’s one post at Investing Pig that runs the correlation after the U.S. left the gold standard in 1971. It shows that the correlation was higher than 0.14 but not high enough to be considered a strong correlation. Here’s another post where the Erik Dellith of Seeking Alpha did a series of excellent studies showing that gold and inflation are not correlated at all.

It’s always better is to buy companies that produce things, return value to shareholders, create value for society. Intel trades for 10 times next year’s earnings and drives most of tech innovation around the world. Eli Lilly trades for 8 times earnings and has raised dividends for 40 years in a row. RIG trades for six times earnings and will grow as long as the US needs oil. AAPL trades for 15 times forward earnings and makes the iPad, which is like a new limb for me. CLF (which I own) trades for just 5 times this year’s earnings.

James Altucher is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.

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5:57 am November 7, 2010

Stan wrote :

Big Difference - we've never had a president like Obama. On every front it almost seems like he's trying to create chaos and strife, from devaluing our currency and sinking us under massive debt to the class warfare and entitlement transfers he's saddling us with. Like it or not, this is something more people are thinking every day and it's going to hasten the price of gold and silver taking off. Most of us don't trust him and if it's not too late to turn this around now, it will be soon.

11:28 am October 4, 2010

Wes wrote :

Gold is NOT an investment its the opposite of an investment, its simply a store of value. If gold goes UP in terms of dollars or euro or yen it just means that it takes more yen euros or dollars to buy "stuff" if it goes DOWN then it takes less euros dollars or yen to buy the "stuff". gold does not change and you cannot get rich without working, unless you steal the money.

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